2424‑0397

第 70 巻 第 2 号
2020 年 9 月

大阪大学経済学会
大阪大学大学院経済学研究科

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大阪大学経済学
目

第70巻

第2号

次

論文
Revisiting the volatility of gold: Is gold a hedge or a safe haven?
……………………………………………………………………………………… Lu Zhaoying

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（1）

Revisiting the volatility of gold:
Is gold a hedge or a safe haven?＊
Lu Zhaoying †Abstract
The main goal of this study is to examine what factors influence gold volatility and to investigate
the role of gold as a hedge or a safe haven. The main finding is that asymmetry, volatility
transmission effect of US dollar exchange rate and that of stock price influence the volatility ingold markets. Taking into account all of these effects, empirical estimates show that gold stillserves as a hedge and a safe haven against US dollar exchange rate and stock markets.
JEL classification: F3, F31, G1, G15
Keywords: Gold, Volatility, Hedge, Safe haven, Volatility Transmission

1 Introduction
1.1 Background
Investors tend to diversify their portfolios by holding some assets which can hedge risks. They holdgold for the sake of hedging inflation when money loses its value. The role of gold as a means ofstoring value has been examined in many literatures (Ghosh et al., 2004; Worthington and Pahlavani,
2007; Tully and Lucey, 2006). Gold is also considered has played an important role in financial
markets, being a means of hedging risks. In periods of financial crisis happened in 2008, we were
impressed by the performance of gold price which rose drastically. For this reason, gold has been citedby media as a way of hedging risks during the market turmoil.
The hedging abilities of gold have been evaluated in recent years. Gold could protect investors
against US dollar exchange rate risks. Capie et al. (2005) analyze whether gold is a hedge against
currency risks, specifically a hedge against Sterling/US dollar or Yen/US dollar exchange rate.
They show that gold can act as an exchange rate hedge, because gold has a negative and inelastic
relationship with US dollar. Joy (2011) analyzes gold’s hedging ability against US dollar with 16
major dollar-paired exchange rates. He came to a conclusion that gold has behaved as a hedge but the＊†

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I would like to thank Professor Hisashi Tanizaki for his advice and participants in International Symposium on
Econometric Theory and Applications for helpful comments.
Graduate School of Economics, Osaka University

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ability of acting as a safe haven is weak in the lower quantiles because gold and US dollar sometimes
are co-move during market turmoil.
Furthermore, some other literatures examine the relationship of gold with bond and stock pricerespectively. Baur and Lucey (2010) analyze the relationship between gold and bond, stock returns.
They find that gold is a hedge and a safe haven against stock market, but not against bond in the U.S..
Another study is Baur and McDermott (2010), by which they expand the data to 53 countries. They
confirm that gold is both a hedge and a safe haven against the U.S. and major European stock markets,
but not for Australia, Canada, Japan and large emerging countries.
Lots of empirical studies have examined the relationship of gold and other assets, but only a few
of them investigate what drives the volatility of gold. Batten, Ciner, and Lucey (2010) investigate
the volatility of several precious metals. They consider some macroeconomic factors such as money
supply and inflation jointly influence the volatility of gold. They also find that some financial variables
like stock market returns and dividend yields could jointly affect the movements of gold. Smales (2014)
analyses that there is an asymmetric response to news releases, that is, negative news invokes a greater
response in gold returns than positive news.
In the studies of stock returns and volatility, some papers find that asymmetric and day-of-the-weekeffects drive the volatility of stock (Engle and Ng, 1993: Watanabe, 2000). Except for asymmetric,
day-of-the-week, holiday effects, Tanizaki (2004) examines these factors and volatility transmission
effect simultaneously in the stock market of Japan.
Refer to the empirical studies with respect to stock returns and volatility, some factors could be
expected to affect gold volatility:(i) Asymmetric effect: a fall/rise in the gold return yesterday leads to a fall/rise in the gold volatility
today.
(ii) Weekend effect: gold volatility on the day after holidays are volatile in financial markets.
Except for these effects mentioned above, other spillover effects could also be taken into
consideration. (iii) Financial Transmission effect: the fluctuations of gold volatility could be influenced
by the changes of US dollar exchange rate or stock markets.
This paper aims to answer whether asymmetric effect and holiday effect still exist in gold as theway of stock markets and to estimate each factors which influence gold volatility by how much. In
addition, by taking into account some factors which could influence gold volatility, empirical results
show that gold still be a hedge or a safe haven or not.
1.2 Main contribution
The contribution of this paper is two-fold. First, some factors which expect to affect gold volatility aretaken into account to construct the model. Asymmetric, holiday and spillover effects from exchange
markets or stock markets are added into gold volatility simultaneously. Based on this framework,
we could know which effects influence gold volatility and by how much. In addition, revisiting thefactors by taking into account all of these factors which could affect the volatility of gold, we further
investigate whether gold is a hedge or a safe haven against exchange markets and stock market risks.

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－3－

The remainder of this paper is presented as follows. Section 2 describes the data. Section 3 discusses
the method. The empirical results and conclusions are presented in Section 4 and 5.
2 DataThis study focuses on whether gold has behaved as a hedge or a safe haven against exchange rate
depreciations or stock market risks, using daily data from 4 January, 1999 to 30 December, 2018. The
start of the sample data is based on the introduction of euro as an accounting currency from January
1999 in financial markets. Gold price data is taken from DataStream, all of the data on exchange rate
and oil price are downloaded from Federal Reserve Bank of St. Louis (https://www.stlouisfed.org/),and S&P500 data is obtained from Yahoo Finance (https://finance.yahoo.com/).
This paper employs the most actively traded gold futures which traded on Chicago Mercantile
Exchange (COMEX) as gold price1. Exchange rates include 7 currencies between US dollar, consistof key currency countries and some of the major gold mining countries. We also consider Trade
Weighted US Dollar Index (DTWEXB) as a proxy of US Dollar exchange rate. Trade Weighted US
Dollar Index (DTWEXB) is a weighted average of the foreign exchange value of the U.S. dollar
against the currencies of a broad group of major U.S. trading partners, a drop in Trade Weighted US
Dollar Index means US dollar depreciation.
Figure 1 depicts daily movement of gold prices on the left vertical axis and Trade Weighted
US Dollar Index on the right vertical axis. In our sample period, gold prices and US dollar movein opposite directions. Especially, in periods of US Dollar fall sharply in 2011, gold price rises
drastically. Figure 2 shows the evolutions of gold price and S&P500 index. Gold price is measured onleft vertical axis and S&P index is on the right vertical axis. From Figure 2, we can see that gold andstock price move in opposite directions in certain periods and co-move in other periods.
3 Empirical methodology
The role of gold is a hedge or a safe haven depends on the correlation with other assets. According toBaur and McDermott (2010), we define a hedge and a safe haven as follows:-Hedge: A hedge is defined as an asset that is negatively correlated with another asset on average.
We say that gold is a hedge against exchange rate if it is negatively correlated with exchange rate.
-Safe haven: A safe haven is defined as an asset that is negatively correlated with another asset incertain periods only, e.g. in periods of severe US dollar depreciation. We say gold is a safe haven if it
negatively correlated with extreme US dollar depreciation.
In this paper, we use GARCH models to deal with volatility clustering, aiming to investigate thegold volatility and the role of gold as a hedge or a safe haven. Based on empirical studies with respect
1

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As in Lucey and Tully (2006), gold price was measured by COMEX gold price which represents the world’s leading
benchmark futures contract, instead of using London PM Fix price. The London PM fix occurs at 3 pm London time,
which is still at mid-morning time in New York. In this sense, the COMEX gold price is more appropriate to this study.

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Figure 1 : Gold price and Trade Weighted US Dollar Index (DTWEXB)

Figure 2 : Gold price and SP 500 index

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－5－

to stock returns and volatility, we assume that the change of gold price is specified as follows:

is gold return andrepresents a 1

is the error term, whereequals tovector of exogenous variables anddenotes awe focus on volatility in the change of the gold price, where
denotes avector of exogenous variables andModel 1 In this model,= 1 andandis distributed by N(0, 1).
1 vector. In Models 1 - 9,

= 0 is taken.

represents a 1

1 vector.

= 1 are taken.

Model 2 (Asymmetric Effect) In stock markets, the asymmetric effect refers to a negative shockyesterday yields high volatility today but a positive shock yesterday does not. However, it may not be
the case in the gold market, as demonstrated in Baur (2012), positive shocks increase gold volatility bymore than negative shocks. In this model, we examine how the sign of gold return yesterday affect thevolatility today.

= 2,

= (1,

) are taken, where= 1 ifof gold is opposite to the stock markets, then the coefficient of

0. Note that if the performance
would take a negative value.

Model 3 (Holiday Effect) During a holiday, the volatility of some assets like stocks and bonds
accumulate much more information than usual. This causes the volatility increase in a holiday. For thisreason, if we have much information, gold return would become unstable. We use the dummy variable
to investigate whether gold volatility on the day after a holiday become volatile.
are taken, where

= 2,

= (1,

)

denotes the dummy variable. If yesterday is a holiday, the dummy variable takes

one, zero otherwise. The amount of information increases during a holiday, then the coefficient ofwould take a positive value.
Model 4 (Volatility Transmission Effect of US dollar) Gold price is measured in the value of local
currency, therefore, gold volatility is affected by the fluctuations of exchange market. Especially, gold
price is dominated by US dollar, the change of US dollar largely affects gold price. To capture thevolatility transmission effect of US dollar exchange rate,

= 2,

= (1,

) are taken, where

denotes return of exchange rate at time t.
Model 5 (Asymmetric Effect of US dollar) Except for the volatility transmission effect of US
dollar in Model 5, we wonder whether a rise or fall in US dollar exchange rate would result indifferent changes in gold volatility.

= 2,

= (1,

) are taken, where= 1 if0. It is examined whether gold volatility depends on either negative or positive sign of the US
dollar exchange rate change.
Model 6 (Volatility Transmission Effect of Stock Price) The fluctuation of stock price is one ofthe potential factors that affects gold volatility. To capture whether the change of stock price has an
impact on gold market,

= 2,

= (1,

) are taken, where

denotes return of stock

price at time t.
Model 7 (Asymmetric Effect of Stock Price) In stock markets, we accept the fact that asymmetriceffect of stock price exists, that is, a fall in stock return would lead to stock volatility increase more.
It may be the same in the gold market, that is, a uncertainty in stock market has larger impact on gold

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Table 1 : Marginal Log-likelihood Function logfY
Model
1

market. In this model,-3009.97012-3000.14023-3007.99024-3005.22025-3008.62026-3004.23027-3008.59028-3009.9702

9-3009.1402

10-2990.05

0

6

= 2,

= (1,

) are taken, where= 1 if0.

Model 8 (Volatility Transmission Effect of Oil Price)
Oil is a driver of inflation, and inflation is also a driver of gold. For this reason, the fluctuation of oil= 2,

price is another potential factor would influence the gold market.

= (1,) are taken,

denotes return of oil price.

where

Model 9 (Asymmetric Effect of Oil Price) In stock markets, we accept the fact that asymmetriceffect of stock price exists, that is, a fall in stock return would lead to stock volatility increase more.
It may be the same in the gold market, that is, a uncertainty in stock market has larger impact on gold
= 2,

market. In this model,= (1,) are taken, where= 1 if0.

Model 10 (Asymmetric Effect, Volatility Transmission Effect of US dollar or Stock Price,
Asymmetric Effect of US dollar or Stock Price) According to estimation results in previous models
will be shown in next section, asymmetric effect, volatility transmission effect of US dollar or stock
price, asymmetric effect of US dollar or stock price are significantly different from zero. Therefore,taking into account these factors simultaneously, we can better analyze the fluctuation of gold price.
= 6,

= (1,

,

,

,

,

) are taken.

Model 11 (Exchange rates and stock price in the extreme quantiles) Model 11 is based onModel 10, adding exchange rates and SP500 index to deterministic components to investigate whether
gold acts as a hedge or a safe haven. The hedging ability of gold is measured by the relationship ofgold and the exchange rates, as well as stock price. Moreover, whether gold functions as a safe havenis tested by applying dummy variables to the first equation.

anddenote returns on

US dollar exchange rate index and returns on SP500 respectively. The dummy variable denoted by
D(...) captures extreme US dollar exchange rate declines or stock market turmoil. Taken SP500 index
for example, the dummy variable is equal to one if the return of US dollar exchange rate lower than acertain threshold like fifth or first percentile of the return distribution.
,,), the estimated coefficients of,If the coefficient

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6

,

,

are taken from

= 4,

= (1,
to

.

,
= 6,

= (1,

) are taken.

is negative and statistically different from zero, gold serves as a hedge

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Table 2 : Estimation Results of Model 10
Variable

Coefficient

Std. Error

t-statistic

Prob.

0.05030.002124.48510.00000.92740.0034272.5815

0.0000-0.00990.0016-6.30370.00000.04030.00685.92820.00000.00190.0014

1.31100.18990.00520.0014

3.63310.00030.00010.00170.03250.9741against US dollar exchange rate. Gold acts as a safe haven against extreme US dollar depreciationandin the 5th percentile if the sum of coefficients ofis negative, and a safe

haven in the 1st percentile in the case of the sum of coefficients of,andis negative. Similarly, whether gold acts as a hedge of stock markets with respect to the, if it is significantly negative, gold is a hedge against stock markets.

sign of coefficient ofMoreover, gold behaves as a safe haven if the sum of parameters is negative. Otherwise, gold would
not act as a safe haven against stock market turmoil.
Model 12 (Exchange rates and stock price in periods of crisis) Instead of 5th and 1st percentiles,in this model we investigate whether gold still serves as a safe haven in periods of financial crisis.
to

= 3,

= (1,

.

= 6,

,
= (1,
to

) , the estimated coefficients of
,

,

,

or

,

are denoted from) are taken. We can also substituteto test whether gold behaves as a safe haven

before or after crisis.
is negative and statistically different from zero, gold serves as a hedge

If the coefficientagainst the stock market. Gold acts as a safe haven in periods of financial crisis if the sum ofcoefficients ofandis negative. Similarly, whether gold acts as a safe havenagainst stock markets before or after crisis with respect to the sign of coefficient oforand, if it is significantly negative, gold is a safe haven against stock markets.

4 Empirical results
We can see from Table 1 marginal log-likelihoodin Model 1 is smaller than that in Model 2,

which means that Model 2 is preferred to Model 1. In addition, the coefficient of asymmetric effectis significantly negative, which verifies the existence of an inverted asymmetric effect in the gold
market. It is consistent with Baur (2012), he finds that positive shocks increase gold volatility by morethan negative shocks. Volatility transmission effect of US dollar is found from Model 1 and Model4, and volatility transmission effect of stock price is observed from Model 1 and Model 6. Moreover,asymmetric effect of US dollar and stock price are also presented by comparing Model 1 to Model 5
and Model 1 to Model 7 respectively. However, as far as we can see from Table 1, holiday effect andtransmission effect of oil price make little difference with Model 1. Estimated results confirm that01経済学E_Lu氏.indd

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Table 3 : Estimation of Model 11 .
Hedge

Safe Haven
5%1%-0.5695**-0.06960.2766**(0.0173)(0.0503)(0.0720)CAD-0.6164**0.07480.0706(0.0271)(0.0710)(0.1068)

CNY-1.0946**-0.2376

0.4237(0.0792)(0.2815)(0.2814)EUR-0.6900**-0.0047

0.2960**(0.0227)(0.0508)(0.0650)-0.5544**-0.0335

0.2189**(0.0206)(0.0487)(0.0517)-0.6629**-0.0073

0.3396**(0.0205)(0.0514)(0.0550)

AUD

JPY
SWI
GBP

-0.5742**-0.0278

0.0931(0.0203)(0.0623)(0.0796)

DTWEXB-1.5725**0.01020.1408(0.0419)(0.1053)(0.1646)

SP500-0.0272**

0.0047-0.0929**(0.0161)(0.0276)(0.0337)

they are insignificant. Therefore, we remove them and combine asymmetric, volatility transmission
effect of US dollar and that of stock price, asymmetric effect of US dollar and that of SP500 index
simultaneously in Model 10. The results are shown in Table 2.
Asymmetric effect, volatility transmission effect of US dollar and that of SP500 index, asymmetriceffect of US dollar and that of SP500 index are represented by. In Table 2, the coefficient of

,

,

,

,

is -0.0099 and it is significantly negative, which means a risein gold return yesterday tend to cause uncertainty in the gold market today. This result implies that aninverted asymmetric effect is observed in the gold market. Unlike to stock markets, positive shocks
increase gold volatility by more than negative shocks because positive shocks are often related to bad
economic circumstances, which result in uncertainties in the gold volatility. Moreover, the coefficientandofare significantly positive, both of them have impact on the gold price. The

volatility transmission of US dollar is much bigger than that of SP500 index, which implies thechanges of US dollar exchange rate influence gold by more than that of stock price.
In addition, a rise or fall in US dollar exchange rate would result in different changes in gold
volatility, in other words, US dollar depreciation increases gold volatility by more than US
dollar appreciation. A possible explanation of this result is that bad financial and macroeconomic
circumstances result in an decrease of US dollar exchange rate, US dollar depreciation further makes
gold prices unstable. Though asymmetric effect of US dollar and that of SP500 index are significantly
positive in Model 5 and Model 7 respectively, neither of them is significant in Model 10.

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Table 4 : Estimation of Model 12 .
Hedge

Safe Haven
Pre-Crisis

CrisisPost-Crisis-0.5919**-0.13200.2327**0.1189**(0.0177)(0.1391)(0.0495)(0.0464)

CAD-0.6244**0.3801**

0.06500.1338*(0.0271)(0.1515)(0.0882)(0.0677)

CNY-1.0581**-0.5330-0.3416-0.0083(0.0587)(0.9414)(0.3493)(0.5064)

EUR-0.6546**-0.5466**-0.5991**

0.1232*(0.0195)(0.2004)(0.0956)(1.0641)-0.5921**-0.0048-0.0909

0.1655**(0.0217)(0.2554)(0.0642)(0.0723)-0.5551**

0.3438*-0.1657

0.3369**(0.0178)(0.1583)(0.0898)(0.0570)-0.5929**-0.2105-0.4557**-0.0090(0.0122)(0.1661)(0.0858)(0.0586)

DTWEXB-1.5702**-0.9845*-0.3525*

0.2343*(0.0400)(0.4702)(0.1837)(0.1174)

SP500-0.0579**

0.1055-0.02210.2476**(0.0124)(0.1119)(0.0388)(0.0451)

AUD

GBP
JPY
SWI

The results of Model 11 are shown in Table 3. The hedging ability of gold is dependent on the sign
. Whether gold acts as a safe haven is determined by the sum of coefficientsof

5th quantile, the sum of

,

and

and

for thefor the 1st quantile.

In the hedge column, all of the coefficients are negative and statistically different from zero. It
implies that gold serves as a hedge against US dollar exchange rate on average. Moreover, the sum ofcoefficients for the 5th quantile and 1th quantile are also negative, which suggests gold is a safe havenagainst extreme US dollar depreciations.
In addition, gold serves as a hedge for stock markets as we can from the last row, the estimatedcoefficient is also significantly negative. Furthermore, even on the worst days of the U.S. stock
market, gold is a safe haven which correlates negatively with the stock market both in 5th and 1thquantile cases.
From Table 4, the estimation results in column of hedge make no difference with that of Table 3.
As a robust check for safe haven, we find that the sum with first column is negative in each column ofsafe haven, which means that no matter in periods of crisis, pre-crisis or post-crisis gold still acts as asafe haven.
5 Conclusion
This study evaluates the volatility of gold with daily data ranging from 4 January, 1999 to 30

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December, 2018. The main finding is that asymmetry, volatility transmission effects of US dollar
exchange rate and that of stock price influence the volatility in the gold market. Note that there isan asymmetric effect, that is, a rise in the gold market yesterday leads to a rise in gold volatility
today. Moreover, volatility transmission effects of US dollar exchange rate affects gold by morethan that of stock price. However, neither of holiday effect and volatility transmission effect of oil
price is significant in our sample period. One of possible explanation is that gold is a homogeneouscommodity traded in several major markets globally. The information is absorbed into gold pricecontinuously partly explains why holiday effect is insignificant. Taking into account all of these effects
which influence gold volatility, empirical results show that gold is not only a hedge but a safe havenin exchange rate markets. Furthermore, gold serves as a hedge and a safe haven in stock markets. Allof these results provide evidence in favor of the statement that even in the worst days of US dollar
exchange rate or stock markets, having gold in portfolios offsets loss due to a decline of US dollar orstock price.
6 References
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evidence with allowance for endogenous structural breaks, Applied Financial Economics Letters,
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Vol. 70

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September 2020

ArticlesRevisiting the volatility of gold: Is gold a hedge or a safe haven?
･･････････････････････････････････････････････････････････････････････････････････････････････････････････････････････ Lu Zhaoying

1

THE ECONOMIC SOCIETY OF OSAKA UNIVERSITYGRADUATE SCHOOL OF ECONOMICS, OSAKA UNIVERSITY